Discussing The Principles Of Optimal Taxation Theory And Analyzing Deductible Business Expenses Under ITAA 1997 And GST Act 1999

Cost of relocation of machine to the new site is considered capital

Question:

Discuss About The Optimal Taxation Theory Principles Fairness?

Cost of relocation of machine to the new site is regarded as capital and no deductions will be allowed in respect of section 8 (1) of the ITAA 1997[1]. If a person is executing the business performance and they are incurring cost that is related to the performance of the business then they will be getting income tax deductions when filing the tax return. Currently, the taxpayer has moved the machine to a new place and this has led to a cost for the taxpayer. As the cost of moving the machine is a capital cost so they will not be allowed for deductions because the cost of the asset has increased[2]. The taxation ruling of TD 92/126 explains that the setting the machine and starting the work for earning business income is treated as revenue. So moving the machine to a new place is cost of capital which ultimately makes the expense to be non-deductible.  

Cost of revaluation to the effect of insurance is observed as repeated cost of business and under section 8 (1) of the ITAA 1997, it is held as deductible expense[3]. Meanwhile if the cost is personal or private or for domestic purpose then it will not be accepted as deductions  because section 8 (1) of the ITAA 1997 does not allows making deductions for expenditure that are not related for business purpose. For a taxpayer it is necessary that they understand the nature of such cost that are considered for deductions because only those cost are allowed as business deductions that are occurred in gaining revenue[4]. As depicted that the cost here is understood as the non-permanent nature of advantage with the nature of recurring business expense so it will be under section 8-1 of the ITAA 1997 considered as deductions[5]. 

The above explanation defines that cost will be taken as allowable deductions since it is recurring business cost and they are occurred in generating business income so it will be considered for deductions under section 8 (1) of the ITAA 1997. 

Considering the pronouncement in FC of T v Snowden and Wilson Pty Ltd (1958) cost of opposing the petition of winding up of business are not allowed for deductions under section 8 (1) of the ITAA 1997 because they are treated as capital expense[6]. The problem above defined that winding up the business in regarded as spending which is not possible for considering it as deductions. Depicting the description of “Taxation ruling of ID 2004/367” where a taxpayer is incurring a legal cost for performance of business it will be treated as business entitlement deductions[7]. The solitary reason for the expense to be regarded for deductions is because they are occurred for deriving income. The legal cost here is not possible to consider it for deductions because they are cost of capital and section 8 (1) of the ITAA 1997 does not permits deductions for such cost.  

Cost of revaluation to the effect of insurance is allowed as a business expense

The above explanation provides that capital expenditure cannot be regarded as allowable deductions under section 8 (1) of the ITAA 1997. Furthermore, these cost is not incurred by the taxpayer in producing taxable income.  

Section 8 (1) of the ITAA 1997 defines that legal expense in discharge of business activities are allowed as deductions[8]. The legal expense occurred for the service of solicitor is a business expense and it is allowed for deductions. Conversely, if the expense is not related for business purpose then deductions will not be allowed. The situation here states that legal expense for taking the service of solicitor for performing business functions is a deductions that can be provided under section 8-1 of the ITAA 1997[9]. 

Legal expense occurred in this context is associated to business so the taxpayer can claim allowable deductions. The reason for considering the expense for deductions is because they will form the part of the revenue and the same is allowed for deductions under section 8 (1) of the ITAA 1997[10].

The study here provides that Big Bank Ltd is a bank that gives financial service to the customers. The bank provides the customers with home and content insurance and also makes financial supplies. The financial supplies made by Big Bank Ltd also consist of the sum of GST. The company has operations across more than fifty branches throughout the Australian and has customers across its branch. The Bank introduced the scheme of providing insurance and home content in the market alongside giving the customers with the facilities of making deposits and loan. The study here is related to determining the input tax credit for advertisement incurred by the Bank under the context of the GST Act 1999[11]. The second chapter of the GST Act 1999 states that where a company can claim input tax credit when the company has occurred any expense that is related to the performance of the business[12]. 

The Goods and Service taxation ruling GSTR 2006/3 offers procedures in computing the input tax credit for the financial supplies made under the GST Act 1999[13]. The ruling is specifically applied to those firms that exceeds fiscal acquisition threshold and those that meets the criteria of claiming input tax credit.

If any organization is providing making GST inclusive supplies then they will be required to be registered under the GST Act 1999. As a result of this business firms will have to make payment of GST relating the financial supplies that the companies make[14]. Additionally, the explanation to the ruling defines that business supplies made by the organizations can be presented for claiming input tax credit together with the figure of GST. There is also a considerations that if the financial supplies has gone past the limit then the companies will not be able to claim input tax credit but they can bring forward the claim of taking a lower amount of input tax credit.

Legal expenses incurred for business activity are deductible

In understanding the GSTR 2006/3 rulings the legislation of “Ronpibon Tin NL v FC of T”, one of the important considerations defined here is that the degree and the extent of supplies including the amount of the GST should be included in deriving the amount of input tax credit[15]. Depicting the explanation of the above defined ruling it can be stated that the GST computation should be in such a manner that is fair for the business unit. The descriptions of the para 11-5 states that whenever a company is making a financial supplies that forms for the creditable purpose then the acquisition must be considered either to a certain extent or exclusively.

If the acquisition made by the company is partially qualifying for the purpose of creditable purpose then it becomes obligatory understand and determine the extent of the supplies made for creditable purpose[16]. On other hand, the chief necessity of “para 11-5 and 15-5” under the ruling of the “GSTR 2006/3” explains that an acquisition will be regarded for creditable purpose if the acquisition is considered entirely creditable[17].   

 As found from the study, that Big Banks expenditure stands $1,650,000 together with the amount of GST. The taxation ruling of Goods and Service taxation ruling GSTR 2006/3 is applied on Big Bank for making the creditable acquisition. To examine the rules of GST Ronpibon Tin NL v FC of T has been applied in this context, which states the process of apportionment of expense, must be reasonable[18]. According to the paragraph 11-5 and 15-5 of the GST Act 1999 an acquisition to be regarded as creditable it must entirely for the creditable purpose. The amount of advertisement expense incurred by Big Bank will be treated as creditable acquisition since it is eligible for claiming input tax credit under the GSTR ruling of 2006/3.

The explanation of the “Section 11-5 and 15-10 provides that if an organization making a creditable supplies or financial supplies will be able to claim input tax credit given the amount of GST is included in the financial supplies. The case study defines that Big Bank has made a financial supplies which is associated to the creditable purpose. As found from this case study is that Big Bank Ltd has already surpassed the limit that has been defined under the GST ruling of “GSTR 2006/3” relating to the financial acquisition[19]. As found that Big Bank has incurred GST for the financial supplies of product and service made by the bank and consequently Big Bank Ltd can introduce the claim of the input tax credit for the GST supplies that has been made by the bank. 

Big Bank Ltd eligibility for input tax credit for advertisement incurred

Conclusion:

The analysis that has been conducted for the case study of Big Bank it can be stated that Big Bank is eligible for claiming input tax credit since it is assumed to have been registered under the GST Act 1999 and meets the eligibility criteria.

Reference List:

Barkoczy, Stephen. “Foundations of Taxation Law 2016.” OUP Catalogue(2016).

Cao, Liangyue, et al. “Understanding the economy-wide efficiency and incidence of major Australian taxes.” Treasury WP 1 (2015).

Woellner, Robin, et al. “Australian Taxation Law 2016.” OUP Catalogue(2016).

Blakelock, Sarah, and Peter King. “Taxation law: The advance of ATO data matching.” Proctor, The 37.6 (2017): 18.

Yong, S. E., and Maggie Ma. “A comparative study of the Goods and Services Tax (GST) implications on real property transactions in Australia and New Zealand.” (2015).

Cassidy, Julie. “A GST with GRRRRRR: Legislative responses to GST tax avoidance in Australia and New Zealand.” Australasian Tax Teachers Association Conference 2017. 2017.

May, Stephen. “Applying the GST to imported digital products and services: Problems and solutions.” Tax Specialist 19.3 (2016): 110.

Tang, Chris. “Australian GST update—2015.” World Journal of VAT/GST Law5.1 (2016): 32-41.

Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and practice. Routledge, 2016.

Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion. Routledge, 2017.

Saad, Natrah. “Tax knowledge, tax complexity and tax compliance: Taxpayers’ view.” Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

Pope, Thomas R., Timothy J. Rupert, and Kenneth E. Anderson. Pearson’s Federal Taxation 2017 Comprehensive. Pearson, 2016.

Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016.

Du Preez, Hanneke. A construction of the fundamental principles of taxation. Diss. University of Pretoria, 2016.

Christie, Michael. “Principles of Taxation Law 2015.” (2015): 814-816.

Fleurbaey, Marc, and François Maniquet. Optimal taxation theory and principles of fairness. No. 2015005. Université catholique de Louvain, Center for Operations Research and Econometrics (CORE), 2015.

Harrow, Benjamin. “Selected Cases on the Law of Taxation (Book Review).” (2013): 38.

Laporte, B., and G. Rota-Graziosi. “Principles and dilemmas in mining taxation.” Financing sustainable development by addressing vulnerabilities. FERDI, forthcoming (2014).

[1]Barkoczy, Stephen. “Foundations of Taxation Law 2016.” OUP Catalogue(2016).

[2] Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and practice. Routledge, 2016.

[3]Cao, Liangyue, et al. “Understanding the economy-wide efficiency and incidence of major Australian taxes.” Treasury WP 1 (2015).

[4] Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion. Routledge, 2017.

[5] Saad, Natrah. “Tax knowledge, tax complexity and tax compliance: Taxpayers’ view.” Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

[6]Blakelock, Sarah, and Peter King. “Taxation law: The advance of ATO data matching.” Proctor, The 37.6 (2017): 18.

[7] Pope, Thomas R., Timothy J. Rupert, and Kenneth E. Anderson. Pearson’s Federal Taxation 2017 Comprehensive. Pearson, 2016.

[8]Woellner, Robin, et al. “Australian Taxation Law 2016.” OUP Catalogue(2016).

[9] Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016.

[10] Laporte, B., and G. Rota-Graziosi. “Principles and dilemmas in mining taxation.” Financing sustainable development by addressing vulnerabilities. FERDI, forthcoming (2014).

[11] Yong, S. E., and Maggie Ma. “A comparative study of the Goods and Services Tax (GST) implications on real property transactions in Australia and New Zealand.” (2015)

[12] Cassidy, Julie. “A GST with GRRRRRR: Legislative responses to GST tax avoidance in Australia and New Zealand.” Australasian Tax Teachers Association Conference 2017. 2017.

[13] Du Preez, Hanneke. A construction of the fundamental principles of taxation. Diss. University of Pretoria, 2016.

[14] Christie, Michael. “Principles of Taxation Law 2015.” (2015): 814-816.

[15] Harrow, Benjamin. “Selected Cases on the Law of Taxation (Book Review).” (2013): 38.

[16] May, Stephen. “Applying the GST to imported digital products and services: Problems and solutions.” Tax Specialist 19.3 (2016): 110.

[17] Fleurbaey, Marc, and François Maniquet. Optimal taxation theory and principles of fairness. No. 2015005. Université catholique de Louvain, Center for Operations Research and Econometrics (CORE), 2015.

[18]Blakelock, Sarah, and Peter King. “Taxation law: The advance of ATO data matching.” Proctor, The 37.6 (2017): 18.

[19Tang, Chris. “Australian GST update—2015.” World Journal of VAT/GST Law5.1 (2016): 32-41.